“Habit is habit, and not to be flung out of the window by any man, but coaxed downstairs a step at a time.” – Mark Twain
I feel like every week I read another story about the terrible state of retirement savings by individuals.
Here are some of the scary retirement stats I read about this week:
- Among Americans ages 50 and older who currently have jobs, 82% expect to work in some form during retirement, according to the poll by the Associated Press-NORC Center for Public Affairs Research.
- Excluding pensions and homes, 39% of survey respondents said they have $100,000 or less saved for retirement. Nearly one-quarter have less than $10,000.
- According to the EBRI, only 40% of American workers took part in their employer’s retirement savings plan last year.
Every time I see these kinds of stats I shake my head. Don’t these people see these stories? Don’t they look at their own finances? Why don’t they do something about this?
There are a number of factors at play here. It’s not so simple to come up with an explanation. One reason is that people just don’t have a firm grasp on the right personal finance and investment-related information.
This comes from a recent Forbes article:
“I’ve got $75,000 sitting in a savings account,” says Diane England, 38, a VP at an advertising agency in Manhattan. “I know I could get more return investing, but I don’t know where to begin. I am frozen by my lack of knowledge and my insecurity that, at my age and income bracket, I should have a clue.”
England, who’s single, isn’t saving for anything in particular, except maybe a down payment on a future beach house. “But that’s not really why I hesitate,” she says. “It’s more out of insecurity and feeling overwhelmed.”
Obviously, having seventy-five grand in a savings account is a problem most people would like to have. Not saving enough or at all is normally the biggest problem for most people. But after you start saving you have to figure out what to do with your money.
The information problem is two-fold: (1) most people don’t know enough because money is a taboo subject and (2) if they try to learn they become overwhelmed and simply give up. That’s what the woman in the article is dealing with.
But the biggest reason that scary retirement statistics don’t work is because it’s hard to change your behavior. To save more instead of spending. To invest for the future instead of sitting on your cash and worrying about the present. To come up with a financial plan instead of just seeing what happens.
No one wants to hear about how much healthcare is going to cost when they retire. That’s boring and kind of depressing. People need to start thinking about the real reasons for living below your means and saving for the future.
Working because you want to, not because you have to. Going on vacations without going into credit card debt. Spending more time with your friends and family instead of working 60 hours a week.
If people spent more time focusing on the real reasons for why they need to save instead of getting a guilt trip about the cost of retirement, they might actually take some action.
So what can you do if you are completely overwhelmed and don’t know where to start?
Use the baby steps approach from What About Bob? to get started.
Thinking incrementally can take some of the stress away from making all of your changes at once.
You wouldn’t go from not jogging at all to immediately trying to run a marathon, would you? Of course not. You start out slow and work your way up over time by training for many months or even years. The same thing applies to your finances.
Here’s how to change your behavior if you are one of the people stuck in the scary retirement statistics stage or simply frozen by the fear of not knowing where to begin.
Baby Step #1 – Start Saving
Don’t even worry about what to invest in or how much money you need to retire. Just start saving. Your financial plan is first and foremost a savings plan.
If you haven’t started saving yet or aren’t saving enough, set a reasonable goal monthly goal. Don’t try to do it all at once. You’ll never stick with it if you try to go from saving nothing at all to saving $500 a month.
Increase the amount you save periodically. Even $10 or $25 every month can add up if you continue to make it a priority. Once you increase the amount you save for a while and start seeing some progress it will become habit forming.
Warren Buffet has a good quote on habits:
Chains of habit are too light to be felt until they are too heavy to be broken.
Many people complain that they have nothing left over after all of their monthly expenses. Unfortunately, the majority of these people have never tracked their spending habits. Do this for at least a month before you claim that you can’t afford to save more. You’ll be surprised how wasteful some of your spending habits can be.
Baby Step #2 – Automate
Since you can’t change your behavior through trying harder (if only that were the case), you must make long-term decisions sticky. Make them hard to turn off. Set it up so the amount you save is automatically deducted from your checking account or paycheck.
The easiest way to do this is through a workplace retirement plan since they can do this for you, but any brokerage firm, mutual fund company or online savings account can set this up for you very easily.
Automating good decisions is probably the best way to change your behavior.
Baby Step #3 – Educate Yourself
Once you have forced yourself to start saving, have studied your spending habits and automated good behavior you can start the learning process.
Read some personal finance and investing books. If you aren’t saving enough or don’t feel comfortable investing because of a lack of understanding of the financial system it’s up to you to make lasting changes. No one is going to hold your hand and make sure you have enough saved up for retirement. Right or wrong, you’re on your own.
Learning from the right sources of information can help you make some changes. Using an incremental approach to improve your behavior can make those changes last.
There’s no easy way to build wealth. It takes time and patience (or baby steps, if you will).
Afraid to invest? You may have sit-it-out syndrome (Forbes)
Most Americans expect to work during ‘retirement,’ poll finds (LA Times)
How to save and invest with smaller amounts of money
I think there are a couple reasons for peoples lack of action when it comes to retirement investing. I think the biggest reason, like you state, is the lack of education. People don’t know what to do and if they try to learn they become overwhelmed.
Another thing I find is that people are very afraid of losing money. So they put it in savings accounts because they feel it’s the safest while not realizing that they are losing out every year in purchasing power. Of course, I think this is part of education as well because people are not understanding how inflation eats away at their savings and also people are uneducated on how a proper long term investment strategy can benefit them over time.
Great points Dan. Loss aversion is a huge reason people don’t save and invest correctly for the future. The possibility of loss scares people from investing in risky assets that are their only shot at growing wealth in the long-term.
It’s hard to understand that volatile investments earn higher returns because they all lose value eventually.
Funny thing is that it is so simple. But I noticed many times it is also a lack of interest and motivation when people are young. Retirement is so far away that they do not care. There are exceptions which I have found in my blog niche only, but in a real life around me (i.e. my office) it is quite miserable.
I’ve noticed the same thing. People don’t start worrying about saving until much late in life even though simple compounding is so much more powerful the younger you start. Saving is also habit forming so even putting aside small amounts of money can have a huge positive psychological impact. Not much seems to work to get people to delay gratification.
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